(Adds a reaction from the International Swaps and Derivatives Association.)
By Sarah N. Lynch Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- Senate Agriculture Committee Chairman Tom Harkin, D-Iowa, plans to introduce a bill Thursday that would force all over-the-counter derivatives, including credit-default swaps, onto regulated futures exchanges.
The bill, if eventually made law, would essentially mean that all derivatives would be defined and traded as futures contracts. In forcing them to be traded this way, it would grant the U.S. Commodity Futures Trading Commission sole regulatory jurisdiction. It would also put to rest recent questions over which federal regulator should have oversight of complex swap products.
"The economic downturn in this country is forcing us to examine all contributing factors on our markets," Harkin said. "With the value of swaps at a high of some $531 trillion for the middle of this year - 8 1/2 times the world GDP [gross domestic product] of $62 trillion - it is long past time for accountability in the markets."
The move would require a radical overhaul of risk-management practices among corporate and financial users of over-the-counter products, a market some eight-times larger than for exchange-traded contracts. While derivatives exchanges are targeting parts of the over-the-counter market, most of the sector is viewed as unsuitable for on-exchange trading because contacts are individually tailored by users, rather than standardized.
Lawmakers have been scrutinizing the role that credit-default swaps played in the financial crisis on Wall Street. Several companies, including CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE), are also preparing to launch competing clearing platforms for credit default swaps, and federal regulators are vying for jurisdiction.
Credit default swaps are privately traded contracts that require one party to pay another in the event that a third party defaults. They have been blamed in large part for American International Group's (AIG) financial woes.
It is highly unlikely the bill will become law before the end of the year. But Harkin is expected to reintroduce the legislation in the next session, according to his staff.
Harkin's bill comes on the heels of a promise he made last month following a hearing before his committee about credit derivatives. At that hearing, he vowed to introduce legislation to force many of these over-the-counter derivatives onto regulated exchanges.
In doing so, those financial contracts would be standardized and centrally cleared. It would also mean that they could be subject to CFTC-imposed speculative position limits and federal reporting requirements.
Under current federal law, certain financial derivatives are excluded from the definition of a commodity. The law, which was amended in 2000, created distinctions between what are known as "exempt" and "excluded" commodities.
The CFTC has no regulatory authority over excluded commodities, which include credit-default swaps. Transactions involving exempt commodities, such as metals and energy, may not fall under some of the CFTC's rules and regulations if those contracts meet certain requirements.
Harkin's new bill, dubbed the Derivatives Trading Integrity Act, would eliminate the distinctions in the law between excluded and exempt commodities, treating them all the same.
"By regulating all futures contracts, the Derivatives Trading Integrity Act restores confidence in the markets and provides the soundness and integrity the financial system needs," Harkin said.
The provisions of the bill, if eventually passed, would take effect one year from the date it is enacted.
Greg Zerzan, the counsel and head of global public policy for the International Swaps and Derivatives Association, said he doesn't believe that Harkin's approach to regulatory reform is the right one.
"A new regulatory framework for the financial services industry is critical to modernizing our approach to sophisticated products and markets," Zerzan said. "However, requiring both on and off-exchange products to be subject to the same regulatory regime would mark a step away from that goal. In addition to the standardized contracts covered under the Commodity Exchange Act there will continue to be a need for customized, privately-negotiated risk management solutions. Eliminating the ability of businesses and investors to use these products would hurt their ability to manage risks and weather tough market conditions."
Harkin's introduction of the bill came on the same day that the House Agriculture Committee heard testimony from state and federal regulators about the future oversight of credit derivatives.
House Agriculture Committee Chairman Collin Peterson, D-Minn., said he didn't know the details of Harkin's bill, but that he is "not opposed to the idea."
Peterson said he plans to re-introduce an expanded version of an old anti-speculation bill in the next Congressional session to include new provisions addressing credit-default swaps.
That old bill, which sought to curb excessive speculation in the oil and commodities markets, passed the House with a veto-proof majority in September, but never managed to become law.
He said he has still not fleshed out the details of what a new version of the bill will entail.
"I can tell you it will be more than what was in the bill the past year, because of what we've learned," he said.
His committee is also going abroad at the end of this month to meet with financial regulators about credit derivatives. He intends to hold another hearing on the topic in December.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com
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(END) Dow Jones Newswires
November 20, 2008 17:33 ET (22:33 GMT)

Publié le 20 novembre 2008 Copyright © 2008 Dowjones